NAMA: The only way out

With the recession trundling on, Hugh McDowell looks at the government’s proposal to kickstart the economy using NAMA

Alongside the Lisbon Treaty referendum this week and December’s Budget, the success of the National Asset Management Agency (NAMA) is central to the current government’s hopes of regaining the trust of the public and turning Ireland’s faltering economy around.

NAMA has faced much backlash since its announcement in April’s emergency budget

Against the backdrop of a sceptical electorate, a wavering coalition partner, and fierce opposition from across the floor of the Dáil, Finance Minister Brian Lenihan and his Fianna Fáil colleagues face one of the biggest challenges of their time in office. With NAMA billed by media and politicians alike as the most important piece of legislation in the history of the state, the stakes – both for the economy and the government – could not be much higher.
In order to assess NAMA, it is important to recognise why government intervention is crucial to resuscitating the Irish economy. The Irish banking sector is a victim both of the global economic downturn and of its own profligacy. When Irish housing prices crashed, the country’s main lenders found themselves severely over-exposed to insolvent property developers. Many of the loans on the books of Ireland’s two largest banks, AIB and Bank of Ireland, are badly impaired and worth barely a fraction of their original value. As a result, Irish banks have dramatically cut their lending – bringing the economy to a grinding halt.
It must be understood that without a fully-operational banking sector, the economy cannot function, let alone recover from a crisis of this magnitude. In order for industry to regain strength and jobs to be created, it is essential the banking liquidity is restored.
The mechanism by which NAMA would do this is a rather complex one. The agency will purchase about €77bn worth of toxic loans (mostly related to the property sector) from Irish banks. These loans will be bought at a knockdown price of roughly €54bn. While this valuation is above current market prices, it reflects the likelihood of a future rise in the value of these loans alongside an expected resurgence in the Irish property market. NAMA will buy these toxic loans with government bonds, which will then be used by the banks as collateral to borrow money from the European Central Bank (ECB). It is envisaged that the agency will break even initially, as costs are offset against interest repayments on loans – and depending on the size and speed of Ireland’s climb out the recession, it may begin to turn a small profit after several years.
Among the criticisms of the proposal is the notion that it will ‘bail out’ those who are responsible for the crisis – bankers and developers. In the case of bankers, this is true to a certain extent. However, the simple truth is that the banks must be bailed out, in some way or another, in order for them to start lending again and for the economy to recover. In addition to NAMA, the government has indicated that it is prepared to increase its ownership in AIB and Bank of Ireland if necessary.
On the other hand, the accusation that NAMA will bail out the property developers who caused this financial mess is plainly untrue. As Colm McCarthy – UCD lecturer and chairman of an Bord Snip Nua – recently commented, developers who currently owe money to the banks will merely have their debts transferred to NAMA. They will still owe just as much as they did before. While the term ‘bailout’ has become popular in the last 12 months, its inaccurate association with NAMA has damaged the esteem with which the agency is held in the public.
Global reaction to the government’s proposal has been positive, including a full endorsement from the International Monetary Fund. The rate at which the Irish government pays interest on its international borrowing has fallen, an indication that foreign governments regard the measure as the way forward for the economy. NAMA has been backed by the European Commission, and falls within the Commission’s guidelines on state-aid to the banking sector.
Domestically, public opinion on the matter is divided. The current government is the most unpopular since the foundation of the State, and is thus struggling to sell any policy to the public – never mind one which as complex as NAMA. On the other hand, Minister Brian Lenihan should be lauded for his recent media outings, in which he has shown a keen grasp of the underlying economic issues associated with NAMA, and an impressive of the command legislation’s finer details.
Politically, NAMA presents several challenges to the government. That Fine Gael and Labour have split over proposed repairs to the banking sector has undoubtedly strengthened Fianna Fáil’s hand. Enda Kenny and Richard Bruton have struggled to have their ‘Good Bank/Bad Bank’ plan included in the mainstream debate, while Labour’s plans to fully nationalise Ireland’s banks have also failed to capture the imagination of the public. Meanwhile, the Green Party membership, in line with their constitution allowing card-carrying members to ratify important decisions made by their TDs, will vote on the NAMA legislation in October. With the Greens still reeling from their abysmal performance in June’s European and Local elections, the membership may put aside their grievances about NAMA in order to avoid collapsing the government and having to face the electorate again.
Any complex economic rescue package is likely to be a hard sell to a recession-hit Irish public. However, the intricacies of NAMA have also made it difficult for the Opposition to highlight any weaknesses. NAMA makes economic sense, and, crucially, does not impose an additional tax burden on the public. It will return liquidity to Irish banks and make it easier for Irish businesses to borrow. This should, eventually, bring jobs and some semblance of prosperity back to the country.